Facing the numbers

LPs are facing many constraints in making commitments to private equity – GP delays in submitting year-end reports are one of the least publicised, writes Andy Thomson.

The sound of limited partners drumming fingers on desks can still be heard. As sister magazine Private Equity International discovered when researching its fundraising cover story for the upcoming April issue, some GPs due to deliver 2008 year-end results to their investors had requested time extensions. Maybe some of these GPs recall the multiple tactics employed in their school days to avoid handing in homework – although the famous last resort of claiming that the dog ate it seems unlikely to pass muster with your average LP.

Some pretty spectacular write-downs of private equity portfolio companies have hit the headlines recently. What they don’t instantly reveal is the relative influence of poor trading performance, on the one hand, and, on the other, the requirement to value in line with public market comparables. Forced to face the reality of splashing liberal quantities of red ink over their reports, GPs have long been complaining about the iniquities of “fair” value and insisting that juxtaposing alternative valuations arrived at by different methodologies is an entirely valid way to proceed.

Andy Thomson

Furthermore, recent conversations lead me to believe that many LPs share these reservations about fair value and agree that alternative valuation methods may be appropriate – desirable even – in certain circumstances. They may therefore applaud recent moves by the Financial Accounting Standards Board in the US to make the marking-to-market rules more flexible. Some GPs may be reassured by this – though presumably in times like these, communicating with LPs is such a high priority that I’m not revealing anything new.

Likewise, GPs may know that some of the media coverage of horrified investor reaction to problems in private equity portfolios has been a little overcooked. Responding to my recent question about whether he had been wrong-footed by the scale of private equity write-downs, the response of a leading UK-based fund of funds manager was “not at all”. The results he was being presented with were more or less in line with what he had long been anticipating. This, it should be added, was the view of a veteran investor with long experience of past cycles and who, rather than predicting the splintering of the private equity model, sees instead only the latest in a long line of historic evolutions the asset class has undergone.   

So, let’s imagine for a second that there are GPs dragging their feet for reasons other than the sheer complexity of the valuation process. The message is: go ahead and submit your homework now. It might warrant a more generous assessment than you’re expecting. And when LPs have your numbers in, they can finally plan future allocations – and start lifting the fundraising market out of its current malaise.